What is a Pump and Dump scam?
We’re going to talk about the famous Pump and Dump scam today. As the market (both crypto and classic exchanges) seems to become more and more popular, there are also a lot of scammers active on the internet. Often when people on the internet promise high returns it is too good to be true. Take a look here at the top 6 crypto scam methods we have come across.
Unfortunately, this term is not even that unrecognizable anymore for those who have been around in crypto for a while. Walletinvestor even keeps a list of all coins suspected of this fraud for a while now.
But the traditional stock exchanges also have many cases of these scams.
Example from Wolf of Wall Street
If you’ve ever seen the movie Wolf of Wall Street, like so many of us, you’ve already been introduced to the pump and dump scam. You haven’t seen it? It is on Netflix now!
Lead actors Jonah Hill and Leonardo DiCaprio have ordered all their traders to promote shares of shoe company Steve Madden for the IPO (Initial Public Offering).
When the stock is finally released on the market after a flaming speech by DiCaprio, all the traders go completely crazy and sell an incredible amount of those shares to investors, who have convinced them that this stock can only go higher.
— Trading Markets (@asegpi) April 3, 2020
Because of the big marketing, things are indeed going very fast for a day or two, after which DiCaprio and Hill sell their huge initial deposit for substantial profits and the rest is saddled with huge losses.
First comes the pumping…
Of course, the internet itself is an excellent platform to make this scam happen. Scammers can easily reach thousands of potential investors with false information via spam email or social media in seconds. Or they set up a website, post a few news items and formulate fake news to attract customers for your investment.
After that, they use forums that a lot of people visit such as job boards, chat rooms and bulletin boards to encourage people to buy shares quickly.
The more this is done, the more awareness is created that the product exists.
Then the real pumping starts. Customers are assured that there are available shares and show the company data (of course fake). After a while, the unsuspecting investors ask to learn more about the target company. They ask for information such as share prices and trading volume.
If also the last hurdle is taken, the interested investors buy the shares (or crypto in our case), which the scammer itself has bought much lower.
And then the dumping…
After the prices rise spectacularly and the stock or crypto coin is even recorded by media platforms, then it is time for the scammer to sell the shares. Because most of the shares are suddenly sold, the price collapses.
Except for the initial investors who were aware of the scam, of course, no one is left with a profit. Often free or paid pump and dump groups are set up by this type of scams. Especially if you don’t know the organizers very well, the chances are very high that you will also be scammed by the paid groups. There is always another group that knows even earlier about the scam.
Many stock exchanges, but also crypto exchanges, have software built in that can recognize these types of scams.
The conclusion is the same as all other things in this world. If something is too good to be true, it is usually not true, so it is best to stay away from it. This is a golden rule that applies to both shares and crypto.